.
.
WICKET SECTION
BEFORE THE
RECElvELl
POSTAL RATE COMMISSION
WASHINGTON,
D.C. 20268-0001
SEPzL1 4 36 P?I ‘91
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OFFlCi
POSTAL RATE AND FEE CHANGES, 1997
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Docket No. R97-1
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RESPONSE OF UNITED STATES POSTAL SERVICIE
WITNESS PANZAR TO INTERROGATORIES
OF
THE DIRECT MARKETING ASSOCIATION,
INC.
(DMAIUSPS-Tl
l-l-2)
The United States Postal Service hereby provides
to the following
USPS-Tll-l-2,
interrogatories
of the Direct Marketing
filed on September
Each interrogatory
responses
of witness
Association,
Inc.:
Panzar
DMA/
IO. 1997
is stated verbatim
and is followed
Respectfully
by the response.
submitted,
UNITED STATES POSTAL
SERVICE
By its attorneys:
Daniel J. Foucheaux, Jr.
Chief Counsel, Ratemaking
/$AZ-+ZYL,Richard T. Cooper
475 L’Enfant Plaza West, S.W.
Washington, D.C. 20260-I 137
(202) 268-2993; Fax -5402
September 24, 1997
--
.----
RESPONSES OF POSTAL SERVICES WITNESS PANZAR TO
INTERROGATORIES
OF THE DIRECT MARKETING ASSOCIATION
DMAIUSPS-Tl l-l. Please refer to pages 3 and 4 of your direct testimony where
you describe an operating plan as “a set of reasonably stable practic:es and
procedures which the Postal Service uses in order to serve the mail volume it
receives. Under this interpretation, the Postal Service’s accounting data
represents the costs of implementing the operating plan under various levels of
mail volumes.”
(4
procedures
Does your definition of operating plan require that the practices and
be economically efficient? Please explain fully.
Please refer to your article, William J. Baumol, John C. Panzar &
(b)
Robert D. Willig, “Contestable Markets: An Uprising in the Theory of Industry
Structure: Reply,” American Economic Review, June 1983, at 494, in which you
state that “_ increased ease of entry and exit improves the welfare performance
of firms and industries.” Please describe the ease of entry in the markets for the
carriage of first-class and Standard A mail. From a theoretical perspective, would
an increase in the ease of entry and exit in a contestable market provide an
increased incentive to a producer to minimize costs as compared to a regulated
monopolist? Please explain fully.
From a theoretical perspective, does a producer who s,ells some
(cl
products in markets with a monopoly and some in markets that are competitive
have an incentive to produce more efficiently in those markets which are
competitive? Please explain fully.
Does the empirical evidence in general support the theory provided
(4
in response to subparts (b) and (c) above? Please explain fully and provide
references to discussions of such empirical evidence.
(e) Please refer to your article, John C. Panzar, “Regulation,
Deregulation, and Economic Efficiency: The Case of the CAB,” American
Economic Review, May 1980, at 313, in which you state that “[r]ecent history
would seem to indicate a clear triumph of economic efficiency over the ‘dead
hand’ of regulation. While I would be among the last to suggest that deregulation
was a mistake, I argue that the issues are more complicated than is commonly
thought; since, if allything, recent results in regulatory theory suggest that
regulation by enlightened, but not omniscient, regulators could in principle
achieve greater efficiency than deregulation.”
Please explain how an enlightened
regulator would increase the efficiency of the Postal Service. In doing so, please
address the fact that ‘I... governments and regulated firms are notoriously inept at
limiting the wage demand of their employees.” John C. Panzar, “Is Postal Service
A Natural Monopoly”, in Comoetition and Innovation in Postal Services (Michael
Crew & Paul Kleindorfer, eds., 1991).
RESPONSES OF POSTAL SERVICES WITNESS PANZAR TO
INTERROGATORIES
OF THE DIRECT MARKETING ASSOCIATION
ANSWERS
to DMAIUSPS-Tl
(a)
l-l:
No. The purpose of my testimony is to explain how to go about
measuring the marginal and incremental costs incurred by the Postal Service.
This is what is most relevant for pricing purposes.
(b)
It is my understanding
that entry into the provision of the mail
services you cite is limited by the Private Express Statutes.
The theory of contestable
markets does not directly analyze the incentives
operating within a firm. In the context
of contestable
market theory, the reason
that “increased
ease of entry and exit improves the welfare performance
of firms
and industries,”
is that firms which operated inefficiently would be replaced by
more efficient rivals.
Cc)
It is certainly the conventional
wisdom that profit seekii?g firms are
under greater pressure to produce efficiently in their competitive markets than in
their monopoly markets.
However, I am not aware of a detailed theoretical
analysis of this question in the contest of an enterprise such as the IPostal
Service, which is not accountable to private shareholders.
(4
It is my understanding
support the theoretical
propositions
that empirical evidence does generally
stated.
However, it is not at all clear that that
evidence is relevant to the Postal Service, for the reason cited in my answer to
(c). I cannot, without further study, provide specific references to the empirical
literature.
RESPONSES OF POSTAL SERVICES WITNESS PANZAR TO
INTERROGATORIES
OF THE DIRECT MARKETING ASSOCIATION
(4
The passage cited was written in the context of the airhe
industry,
and referred to regulatory policies designed to improve the efficiency of that multifirm industry, rather than the efficiency of any particular firm. Similarly, in the
postal and delivery industry, regulatory policies with regard to the level of
worksharing
discounts can affect the economic efficiency of the indu.sfry without
necessarily
having any effect upon the productive efficiency of the Postal Service,
or the wages it pays.
RESPONSES OF POSTAL SERVICES WITNESS PANZAF! TO
INTERROGATORIES
OF THE DIRECT MARKETING ASSOCIATION
DMA/USPS-Tll-2.
In recent decisions, the Postal Rate Commission has
attributed the cost of single subclass stops in Cost Segment 7. See R90-1 RD on
Remand at 26 - 56 (Sept. 27, 1994); R94-1 RD at 111-28-46(Nov. 30, 1994); R941 Further RD at 7 - 40 (June 7, 1995).
(4
marginal?
Do you consider these costs to be incremental rather than
Please explain your reasoning fully.
Please refer to your testimony at p. 28, lines 7-8. Should these
(b)
single-subclass-stop
costs be part of the “basis for the mark-ups required to
satisfy the break-even requirement”? Please explain fully.
Please confirm that the Postal Service’s prior practice of attributing
Cc)
incremental costs (including specific fixed and volume variable costs) is contrary
to your direct testimony in this filing that mark-ups should be based on marginal
costs (equivalent to volume variable costs).
ANSWERS:
(4
It is my view that the costs of single subclass stops are incremental
costs of the subclass in question.
They tend to be larger, on a per unit basis,
than the marginal (or unit volume variable) costs of the subclass.
My reasoning is
explained in detail in my testimony in that Docket.
(b)
The question is misleading.
The basis for mark-ups should be
marginal (unit volume variable) costs. The issue was not whether or not the costs
of single subclass stops should be included in this basis. Rather, the issue was
that the costs of both single subclass stops and multiple subclass stops should be
analyzed jointly when attempting to measure the marginal (unit volume variable)
costs of any subclass.
RESPONSES OF POSTAL SERVICES WITNESS PANZAR TO
INTERROGATORIES
OF THE DIRECT MARKETING ASSOCIATION
(4
It is my understanding
that the Postal Service has in the past
attributed specific fixed costs, along with volume variable costs, which is contrary
to my testimony.
I am not aware that the Postal Service has made it a practice to
attribute incremental
costs
DECLARATION
I, John C. Panzar, declare under penalty of perjury that the foretgoing answers
are true and correct, to the best of my knowledge,
information, and belief.
P- :
?$dL-
John C. Panzar\
Dated:
T-2+-
9
7
CERTIFICATE
OF SERVICE
I hereby certify that I have this day served the foregoing
participants
of record in this proceeding
in accordance
document
with section 12 of the Rules
of Practice.
/wn&lp4
Richard T. Cooper ’
475 L’Enfant Plaza West, S.W,
Washington, D.C. 20260-I 137
September 24, 1997
upon ail